By V. John Ella
Minnesota Statutes Section 181.988, which went into effect on July 1, 2023, bans noncompete agreements entered into after that date. In doing so, however, the Legislature has also affirmed that nonsolicitation agreements are enforceable and consistent with Minnesota public policy. Minn. Stat. SS 181.988, Subdivision 1, states in part: “A covenant not to compete does not include a nonsolicitation agreement, or agreement restricting the ability to use client or contact lists, or solicit customers of the employer.”
Contracts prohibiting solicitation of customers by departing employees have been utilized for many decades in Minnesota, often in conjunction with a noncompete provision. Now that noncompetes are banned in Minnesota, nonsolicit clauses will ascend in importance to become the primary means of protecting customer goodwill.
In a sense, this is not a tectonic shift. Historically, pure noncompetes were only enforceable to the extent they were necessary to protect a legitimate business interest. Courts in Minnesota had largely limited the scope of “legitimate business interest” to (a) customer goodwill and (b) confidential and proprietary information.1 A nonsolicit paired with a nondisclosure should, therefore, offer almost as much protection as a blanket noncompete.
The noncompete previously held allure, however, because the former employer could attempt to enjoin the former employee from working at all. If successful, the former employer would avoid the challenging task of proving actual damages in the form of lost profits. Because courts in Minnesota have become less inclined to grant injunctions over the past decade or so, practitioners have become less likely to seek injunctive relief. That means we have already started the transition away from injunction battles and toward showing actual harm from diversion of customers or other business. (To be clear, injunctive relief to enforce a nonsolicit is a viable option, but it does not keep the employee from working for a competitor.)
Minnesota court decisions regarding nonsolicitation provisions
Under Minnesota law, a nonsolicitation-of-customers agreement is enforceable if it is supported by consideration, it protects a legitimate employer interest, and it is reasonable in scope.2 In Dynamic Air, the Minnesota Court of Appeals held that a territorial limitation is irrelevant with regard to a nonsolicitation covenant because the restriction to former clients is sufficiently narrow.
Minnesota courts had sometimes expressed a preference for nonsolicits over noncompetes because they are less burdensome and more precise. In Thermorama, Inc. v. Buckwold,3 the Minnesota Supreme Court noted that if the former employee had not breached the terms of his agreement, he would “suffer little detriment by the issuance of the injunction,” but on the other hand, if the employee breached, then “the former employer may well lose a number of customers for whom it has not had a fair opportunity to compete, and may forfeit as well future benefits which are difficult to evaluate.”4
In Softchoice, Inc. v. Schmidt,5 the Minnesota Court of Appeals held that a promotion was sufficient consideration to support a nonsolicitation agreement, suggesting that the strict consideration requirements for nonsolicits are the same as for noncompetes.
Minnesota courts have applied the “blue pencil doctrine” to limit nonsolicits to certain customers.6
What is “solicitation”?
Whether “solicitation” must involve an active outreach to the customer is frequently debated. The employee sometimes claims that they did not solicit the customer; rather, the customer approached them and they merely provided services. This begs the question of what the term “solicit” actually means. Minnesota appellate courts have not squarely addressed this question, although they have danced around it for over a hundred years.7
In Al’s Cabinets, Inc. v. Thurk,8 Al’s Cabinets sued former employee Jack Thurk and his new employer, alleging that Thurk had violated a nonsolicitation agreement. While working for his new employer, Thurk accepted two orders from clients at his former employment. Both clients called and initiated the contact, one of which, Thurk claimed, “occurred without his knowledge or participation.”9
The district court found that while there was no direct showing that Thurk had solicited his former customer, his preparation of a bid containing pricing and delivery guarantees were “designed to induce the customer to enter into a contract….”10 The appeals court affirmed the lower court’s decision, stating:
“[T]he nonsolicitation provision does not just prohibit endeavors to ‘divert or entice away’ business from respondents; it also expressly prohibits Thurk from ‘attempt[ing] to sell or market any products to’ respondents’ customers. Product pricing is an important aspect of inducing a customer to enter into a contract. Therefore, regardless of who initiates the contact, it would be unreasonable to construe the preparation of a bid for a potential customer in connection with a specific project as anything other than an ‘attempt to sell’ a product.”11
The court concluded that the district court did not err in holding that Thurk violated the non-solicitation agreement.
In 2013, however, a federal court in Minnesota distinguished the holding in Al’s Cabinets. In Honeywell Int’l v. Stacey,12 Honeywell sued a former employee whom it alleged had breached a noncompete agreement. New Jersey law governed the agreement. The nonsolicitation agreement prohibited Stacey from directly or indirectly soliciting, or attempting or assisting to solicit, Honeywell’s customers.13 Stacey’s defense was that “so long as the customer first contacts [him], and [he] does not first contact the customer, [he] has not ‘solicited’ the customer in violation of his agreement with Honeywell.”14 Honeywell argued Stacey anticipatorily violated the agreement by expressing his belief that working with his new employer’s preexisting customers was permitted, even if they were also Honeywell’s customers.
The court found that New Jersey precedent supported Stacey’s position that former employees who do not initiate contact with former clients, and merely accept the business, do not violate their nonsolicitation agreements. The court distinguished the cases advanced by Honeywell because they “involve[d] broader contractual language.”15 The court also categorized Al’s Cabinets as a nonsolicitation agreement that used broad contractual language because it prohibited the former employee from “‘attempt[ing] to sell or market any products’ to former clients.” The case that most clearly supported Honeywell’s argument, the court noted, did not hold “that accepting business from a former client constitutes solicitation; instead, it holds that, under the facts of that case, the defendant’s activities constituted more than merely ‘accepting business.’”16
In another case, the Minnesota Court of Appeals upheld a restrictive covenant against soliciting customers. In Webb Publishing v. Fosshage,17 after terminating an employee from his position as an account executive, the employer brought an action for damages and injunction to enforce the restrictive covenant agreement, which provided that the employee would not solicit customers of his division for a period of 18 months.18 The court noted that the employee’s success in soliciting business from his customers demonstrated the “personal hold” he had on them, that loss of these customers would cost the employer 45 percent of its custom publishing revenue, and the damage to its business reputation in that area would be substantial and not easily measured.
Does the new Section 181.988 allow or bar agreements “not to do business” with a customer?
When a nonsolicitation agreement does not explicitly forbid acceptance of unsolicited business, many courts around the country have interpreted such agreements in favor of the former employee. Conversely, many courts have enforced less ambiguous nonsolicitation agreements that prohibit former employees from accepting business from former clients. Al’s Cabinets, Honeywell, and other decisions highlight the importance of including broad language in Minnesota nonsolicits, at least before the new Section 181.988 was enacted. This is because covenants not to “do business with” clients circumvent the whole bothersome question of whether “solicitation” occurred.
But a significant uncertainty arises as to whether the new statute allows such language. On the one hand, a restriction on “doing business” with a client might be seen as a species of nonsolicit restriction, but simply less ambiguous as to the meaning of “solicit.” On the other hand, a restriction on “doing business” with clients might be seen by a court as a form of a noncompete because it restricts the employee from performing “work for another employer in a capacity that is similar to the employee’s work for the employer that is party to the agreement” under 181.988, Subd, 1 (3). This may be one of the first questions the courts will be asked to answer when interpreting the new law.
Pre-existing customers
New York law has developed a doctrine that disallows employers from restricting former employees from soliciting business from customers or client relationships that they had prior to employment.19 Minnesota has not expressly adopted this concept. In one Minnesota federal court decision, the court affirmatively enforced a restrictive covenant that applied to a group of employees’ pre-existing customers. In Merrill Corp. v. R.R. Donnelley & Sons Co.,20 the court observed that the restrictive covenants prohibited the individual defendants from soliciting “existing or potential Merrill client[s]” and made no exception for pre-existing clients brought to the company by the individual defendants. The court held that once the individual defendants began working for the company and once their pre-existing clients became clients of the company, that those clients became “existing” clients and were protected by the restrictive covenants.
The Minnesota Court of Appeals reached the opposite conclusion, however, in Sysdyne Corp v. Rousslang.21 In Sysdyne, an employer sued its former employee for breaching nonsolicitation provisions of a restrictive covenant agreement and sued the new employer for tortious interference with contractual relations and prospective business relationships. The nonsolicitation provision provided that the employee may not “in any manner contact, solicit or cause to be solicited, customers or former or prospective customers” of the former employer, located in the seven-county metro area. The Minnesota district court “blue-penciled” the employment agreement to exclude the employee’s pre-existing customers from the restrictive covenant agreement.22 The district court concluded that in regard to pre-existing customers, the former employer was “not seeking to prevent [the employee] from appropriating [the employer’s] relationships as his own; rather, [the employer] was seeking to appropriate the employee’s relationships as its own.”23 The district court further explained that “guarding against appropriation is a legitimate business interest, appropriation is not.” The Minnesota Court of Appeals upheld the district court’s application of the blue pencil doctrine and found that the district court did not abuse its discretion by modifying the nonsolicitation provision to exclude the employee’s pre-existing customers.
As nonsolicits rise to the fore in the face of Minnesota’s new ban on noncompetes, legal advisors should pay careful attention to drafting language that is as broad as possible without running afoul of a noncompete ban. Litigators should keep in mind that a common law claim of breaching the duty of loyalty can be asserted against an employee who solicits customers for himself or a competitor prior to the last day of employment.
Nonsolicitation of employees
Provisions barring solicitation of other employees have become extremely common in Minnesota but there are few court decisions interpreting their use. These restrictions have not attracted as much public or legislative attention as noncompetes have. Inasmuch as they are intended to prevent employee mobility, it is possible we will see increased scrutiny of these provisions in the future.
Minn. Stat. §181.988 refers to both a “nonsolicitation agreement” and an “agreement restricting the ability to use client or contact lists, or solicit customers of the employer.” If a nonsolicitation agreement is different from an agreement “restricting the ability… to solicit customers of the employer,” then by canons of statutory construction, each must mean something distinct. One possibility is that the statute also tacitly refers to nonsolicitation of employee provisions.
No Minnesota appellate court has squarely addressed the enforceability of nonsolicitation-of-employees covenants in a reported decision. It is generally assumed, however, that post-employment restrictions on recruiting employees are lawful in Minnesota and should be analyzed under the same legal framework as any other restrictive covenant. In order to make it enforceable, therefore, the employer would have to demonstrate that it has a legitimate protectable interest, that the restriction is reasonably necessary to protect that interest, and the employee received adequate consideration, among other factors.24 The same question arises as to whether “solicitation” of employees must be “direct,” as is the case with customers.
In Schwan’s Consumer Brands North America, Inc. v. Home Run Inn, Inc.,25 a judge in the U.S. District Court for the District of Minnesota found that a non-solicitation of employee provision did not appear to be supported by adequate consideration under Minnesota law, essentially applying the same analysis used for noncompete agreements. In Frank B. Hall & Co. v. Alexander & Alexander, Inc.,26 the Eighth Circuit Court of Appeals appeared to assume that an “anti-raiding” agreement was enforceable under Minnesota law and observed that the nonsolicitation clause “did not prohibit the parties from merely hiring an employee of the other without solicitation.”
The Minnesota Court of Appeals denied injunctive relief to enforce an employee nonsolicit in ReliaStar Life Insurance Co. v. KMG America Corp.27 In ReliaStar, two executives resigned from ReliaStar. After their resignation, they solicited and made offers to eight other ReliaStar employees to join KMG, successfully hiring seven. The original two executives were subject to a prohibition on soliciting “employees, agents, and customers” for a period of 12 months. The trial court denied Reliastar’s motion for an injunction and the court of appeals affirmed.28
In another employee solicitation dispute, this time involving the freight-brokerage industry, a court in Hennepin County issued an injunction prohibiting “all” employees who used to work at one company (XPO) and who were still subject to a two-year nonsolicitation provision with their former company (C.H. Robinson) “from soliciting or initiating contact regarding employment with any C.H. Robinson employee for the period of their non-solicitation agreement.”29 To be clear, the court did not prevent anyone who had already been solicited from continuing their employment. The court in C.H. Robinson emphasized the protected interest at stake, noting, “Plaintiff’s… [a]greements are properly read as preventing former employees from leveraging their relationships with current employees, whom they were exposed to as a result of their employment with Plaintiff, in an effort to misappropriate the goodwill that Plaintiff’s employees have developed with Plaintiff’s customers.”30
If a plaintiff does not seek injunctive relief, or if it is not available, Minnesota courts have provided little guidance as to the measure of damages in the case of a breach of a nonsolicitation agreement. Lost damages might include cost of recruiting and training a replacement, and possibly more.31
Conclusion
Minnesota’s ban on noncompetes will not end the motivation for former employers to assert lawsuits against former employees if the former employer thinks that their customer base or business is in jeopardy. Nonsolicitation agreements will be the primary basis for these types of disputes going forward.
V. John Ella is an attorney at Fafinksi Mark & Johnson, P.A. and often litigates nonsolicitation provisions.
Notes
1 Oberfoell v. Kyte, A17-0575, 2018 WL 492629 (Minn. Ct. App. 1/22/2018).
2 Dynamic Air, Inc. v. Bloch, 502 N.W.2d 796, 800 (Minn. Ct. App. 1993).
3 125 N.W.2d 844 (Minn. 1964).
4 Id. at 845.
5 763 N.W.2d 660 (Minn. Ct. App. 2009) (partially applying Missouri law).
6 See, e.g., Management Recruiters Int’l v. Professional Placement Servs., No. C6-91-2055, 1992 WL 61542, at *1 (Minn. Ct. App. 3/31/1992) (narrowing non-solicitation provisions applicable to recruiter by prohibiting him from having contact with five specific telecommunication companies); Yonak et al. v. Hawker Well Works Inc. et al., No. A14-1221, 2015 WL 1514166, at *1 (Minn. Ct. App. 4/6/2015) (upholding the district court’s narrowing of a nonsolicitation provision “to the employees, lenders, suppliers and customers of the Defendants that existed on or before” a specific date).
7 See, e.g. Menter Co. v. Brock, 180 N.W. 553, 555 (Minn. 1920)
(“There is no evidence that [the former employee]... made or threatened to make any effort to secure or attract plaintiff’s patrons.”)
8 No. C9-02-1348, 2003 WL 891419 (Minn. Ct. App. 3/4/2003).
9 Id. at *1–2.
10 Id. at *3.
11 Id. at *4.
12 No. 13-CV-3056 PJS/JJK, 2013 WL 9851104 (D. Minn. 12/11/2013).
13 Id. at *8.
14 Id.
15 Id. (emphasis added) (citing Esquire Deposition Servs., LLC v. Boutot, No. 09–1526, 2009 WL 1812411, at *1 n.1 (D.N.J. 6/22/2009) in which a former employee could not “solicit or contact… to do business with” former clients or customers); Platinum Mgmt., Inc. v. Dahms, 666 A.2d 1028, 1033 (N.J. Super. Ct. Law Div. 1995) where a former employee could not solicit or accept business from former customers).
16 Id. (citing FCE Benefit Adm’rs, Inc. v. George Washington Univ., 209 F.Supp. 2d 232, 239–40 (D.D.C. 2002)).
17 426 N.W.2d 445 (Minn. Ct. App. 1988).
18 Id. at 447.
19 BDO Seidman v. Hirshberg, 93 N.Y.2d 382, 690 N.Y.S.2d 854 (1999).
20 2008 WL 3162490, *1 (D. Minn. 8/1/2008).
21 No. A13-0898, 2014 WL 902713, *1 (Minn. Ct. App. 3/10/2014) (unpublished).
22 Id. at *2.
23 Id. at *4.
24 See, e.g. Webb Publishing Co. v. Fosshage, 426 N.W.2d 445, 449-450 (Minn. Ct. App. 1988).
25 No. 05-2763 (DWF/JJG), 2005 WL 3434376 (D. Minn. 2005).
26 974 F.2d 1020, 1024, n.5 (8th Cir. 1992).
27 No. A05-2079, 2006 WL 2529760 (Minn. Ct. App. 9/5/2006).
28 Id. at *6.
29 C.H. Robinson Worldwide, Inc. v. Kratt, No. 27-CV-1216003, 2013 WL 6222078 (Henn. Co. Dist. Ct., 4th Judicial Dist. of Minn., 1/17/2013.)
30 Id. at *24.
31 See, e.g. St. Jude Medical, S.C., Inc. v. Biosense Webster, Inc., 818 F.3d 785 (8th Cir. 2016) (affirming damages for “lost profits” arising from tortious interference by hiring employee with a “term of years” contract).